June 30, 2021 | International Organizations Monograph

World Trade Organization

June 30, 2021 | International Organizations Monograph

World Trade Organization

Introduction

The World Trade Organization (WTO) is an intergovernmental body charged with regulating international trade. It officially commenced operations in 1995, replacing the General Agreement on Tariffs and Trade.1 With more than 164 member states, which collectively account for 96 percent of all international trade and 97 percent of global gross domestic product, the WTO is the largest international economic organization in the world.2 The WTO seeks to lower trade barriers through negotiation, thereby allowing trade to flow smoothly and providing members with an objective, rules-based mechanism for dealing with trade disputes.

WTO member states rely on consensus to make major decisions, made either by ministers, who meet at least once every two years, or by their ambassadors or delegates, who meet regularly at WTO headquarters in Geneva, Switzerland. A 600-person secretariat supports the WTO’s efforts, primarily by servicing WTO delegate bodies with respect to negotiations and the implementation of trade agreements. Any WTO member that assesses another member is in breach of a WTO agreement can use the organization’s dispute settlement system to settle the disagreement.3

The WTO’s operating budget consists of mandatory annual dues, apportioned using a formula that assesses each member’s share of international trade in goods, services, and intellectual property. Its 2020 budget totaled approximately $220 million, spent mostly paid on salaries, consulting fees, and general maintenance.4 In 2020, the United States contributed $25 million to the WTO, accounting for approximately 12 percent of the organization’s budget.5

Problems

There is a strong international consensus about the need for WTO reform, primarily in response to the unique challenges posed by China’s distinctive economic structure, including its predatory economic behavior and non-market practices.6 These efforts, such as Beijing’s reliance on industrial subsidies7 and forced technology transfer,8 run counter to WTO rules and norms. China also routinely employs other mercantilist trade practices, such as high tariffs and domestic content requirements, to illegally discriminate against foreign products and foreign producers. Owing to gaps in rules, the WTO remains ill-equipped to respond to these and other Chinese provocations.

In response to these and other pressures, the international trading system has devolved into one marked by wildly uneven tariffs and the promotion of trade rules that often apply to some countries but not others.9 For example, in the case of China and India, the world’s second- and fifth-largest economies, respectively,10 WTO rules allow both countries to self-identify as “developing countries,” thus allowing them special treatment on a wide range of trade-related issues.

The organization’s consensus-based governance model, coupled with the WTO director-general’s limited decision-making authorities, has hindered one of the WTO’s core missions – negotiating new trade agreements. In fact, in its entire history, the WTO has negotiated only one trade agreement covering all its members, the 2013 Trade Facilitation Agreement.11 That deal was possible only because it provided developing countries with tremendous flexibility in determining which commitments they would implement. In the absence of new trade deals, smaller blocs of WTO states have instead begun discussing separate, plurilateral agreements on a wide range of issues, including digital trade and e-commerce.

A number of the WTO’s current challenges are directly linked to its two-tier dispute settlement system, in which an expert panel makes a preliminary ruling about a member’s violation of WTO rules. Appeals to those rulings can be elevated to the WTO’s Appellate Body, which previous U.S. administrations asserted was diminishing member rights and creating new obligations not found in the ruling’s original text.12 In protest, the Trump administration refused to support the appointment of new members to the Appellate Body. As a result, the Appellate Body currently lacks the necessary quorum of judges to evaluate and issue new rulings.

Beijing maintains a surprisingly strong track record of compliance with WTO rulings on complaints brought against China.13 However, the WTO’s dispute settlement mechanism is itself incapable of addressing all of China’s trade violations, a number of which fall outside the scope of the WTO’s current rules. This includes China’s failure to fulfill its obligations to protect copyrights, trademarks, patents, and other intellectual property rights, some of which also fall under the jurisdiction of the UN World Intellectual Property Organization.

Recommendations

As the world deals with the fallout from COVID-19 and China’s increasing use of coercion to advance its economic ambitions, a healthy debate about the WTO and the benefits of free trade is warranted. But withdrawal from the WTO would be economically devastating for the United States and would allow other WTO members, such as China and the European Union, to benefit while relegating America to the sidelines. Instead, the United States, in concert with its allies, should endeavor to reform the WTO from within, with a focus on addressing China’s coercive, non-market practices. As part of this effort, the United States should:

  • Maintain leverage to reform the Appellate Body. The Biden administration should maintain the Trump administration’s stance regarding dispute settlement reform, including by refusing to appoint any new members to the WTO’s Appellate Body until appropriate changes can be agreed upon by the WTO’s 164 members. A series of proposals developed in 2019 by WTO-appointed special facilitator David Walker address a number of U.S. concerns and provide a starting point for broader negotiations.
  • Initiate more complaints against China. While imperfect, the WTO’s dispute resolution process has proven partially effective in addressing China’s protectionism and its other illegal trade practices. The problem, however, is that this process has been underutilized by the United States and its allies, particularly as it relates to Chinese intellectual property theft, forced technology transfer, and state subsidies.
  • Develop an allied framework to discuss needed rule changes. The United States and its closest allies should develop a collaborative framework to evaluate new WTO rules to address the economic distortions associated with China’s state capitalism.
  • Get Congress off the sidelines. Congress has an important role to play on trade matters, and there is strong bipartisan support for WTO reform and for a tougher line on China. Increased congressional attention on WTO reform will signal a seriousness about this issue, which may strengthen the hands of U.S. negotiators as they seek to present a united American front when dealing with other WTO members.

  1. World Trade Organization, “History of the multilateral trading system,” accessed May 20, 2021. (https://www.wto.org/english/thewto_e/history_e/history_e.htm)
  2. “Introduction and Summary,” Handbook on Accession to the WTO (Geneva, Switzerland: World Trade Organization, 2008). (https://www.wto.org/english/thewto_e/acc_e/cbt_course_e/intro_e.htm); “Accession in perspective,” Handbook on Accession to the WTO (Geneva, Switzerland: World Trade Organization, 2008). (https://www.wto.org/english/thewto_e/acc_e/cbt_course_e/c1s1p1_e.htm)
  3. World Trade Organization, “Dispute settlement,” accessed May 20, 2021. (https://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm)
  4. World Trade Organization, “Annual Report 2020,” 2020, page 179. (https://www.wto.org/english/res_e/booksp_e/anrep_e/anrep20_e.pdf)
  5. Ibid., pages 180–181.
  6. “G20 Ministers Support WTO Reform, Trade Recovery,” International Institute for Sustainable Development, October 1, 2020. (https://sdg.iisd.org/news/g20-ministers-support-wto-reform-trade-recovery); “G7 says to counter ‘non-market’ policies from China to ensure free trade,” Reuters, February 19, 2021. (https://www.reuters.com/article/us-g7-meeting-statement/g7-says-to-counter-non-market-policies-from-china-to-ensure-free-trade-idUSKBN2AJ1WA)
  7. “An Assessment of China’s Subsidies to Strategic and Heavyweight Industries,” Capital Trade Incorporated, March 23, 2009. (https://www.uscc.gov/sites/default/files/Research/AnAssessmentofChina’sSubsidiestoStrategicandHeavyweightIndustries.pdf)
  8. Sean O’Connor, U.S.-China Economic and Security Review Commission, “How Chinese Companies Facilitate Technology Transfer from the United States,” May 6, 2019. (https://www.uscc.gov/sites/default/files/Research/How%20Chinese%20Companies%20Facilitate%20Tech%20Transfer%20from%20the%20US.pdf)
  9. Robert E. Lighthizer, “How to Set World Trade Straight,” The Wall Street Journal, August 20, 2020. (https://www.wsj.com/articles/how-to-set-world-trade-straight-11597966341)
  10. World Bank, “GDP (current US$),” accessed May 20, 2021. (https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?most_recent_value_desc=true)
  11. World Trade Organization, “Trade facilitation,” accessed May 20, 2021. (https://www.wto.org/english/tratop_e/tradfa_e/tradfa_e.htm)
  12. Ambassador Robert E. Lighthizer, Office of the U.S. Trade Representative, “Report on the Appellate Body of the World Trade Organization,” February 2020. (https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_Organization.pdf)
  13. James Bacchus, Simon Lester, and Huan Zhu, “Disciplining China’s Trade Practices at the WTO: How WTO Complaints Can Help Make China More Market‐​Oriented,” Cato Institute, November 15, 2018. (https://www.cato.org/policy-analysis/disciplining-chinas-trade-practices-wto-how-wto-complaints-can-help-make-china-more)

Issues:

China International Organizations